US Dollar, Euro, Yen and Sterling Poised for Extended Moves or Reversals?

The US Dollar Index has traded between the ranges of 100 to 93 since March-2015, which has made it range-bound. In December-2015, it began its descent as it started to weaken against the Euro and Yen currencies. Currently trading near levels which have displayed consistent levels of buying support, the greenback may be overdue for a bullish reversal as it has made a new three-day high. It is within striking distance of its 50-day moving average, which, if it were to reclaim, would throw down the gauntlet for a test of near-term resistance @ 96.

Click to enlarge

The economic landscape from the vantage points of the US, Europe and Japan are dominated by several concerns:

USA / Employment Outlook: Today’s Jobless Claims report for the week of June-4-2016 was much better than expected and counterbalances negative sentiment towards the last week’s disappointing Employment Situation report. It indicated new claims @ 264k vs estimates @ 270k and prior revisions @ 268k. The 4-week moving average also dropped to 269.5k vs. previous (revised) @ 277k. Even better than this were Continuing Claims, which fell 77k and lowered the 4-week moving average by -18k to 2.145mm.

Europe and Asia / Ineffective Monetary Policies: The recent admission by ECB Chair Draghi that the long-awaited economic recovery in the EU is simply not happening confirms that monetary policy alone is not sufficient to help meet its objectives. Combine this with Japan’s Abe standing down on a proposed consumption tax increase, which also essentially translates into failure by the BOJ and one can see that the journey of 12 steps has begun.

Advanced Economies Growing Pains: The World Bank reduced its 2016 outlook for global economic growth to 2.4% from 2.9%. It also tamped down 2016 estimates for the US to 1.9% and overall is not that optimistic on advanced economies while commodity prices remained at depressed levels.

British referendum on exiting EU: Overshadowing the global economy these days is the “Brexit” issue to be decided on June-23-2016. Until then, major central banks and multi-national companies are constrained from making any effective strategic or policy decisions. The uncertainty has been a contributing factor to market volatility and one should expect more as the date draws nearer.

In response to the above economic scenario, major currencies, e.g. Euro, Yen and Sterling Pound are trading in tight holding patterns and developing setups for some extended moves or reversals. (See charts below)

1) The EUR/USD could break either way, but has a fundamental and technical bias towards 1.08 and 1.06 while its resistance resides @ 116.

Click to enlarge

2) The USD/JPY is continuing its downtrend. As a safe haven, the Yen tends to react in an opposite manner whenever economic concerns for weakness emerge. However, there appears to be solid support @ 106 and 105 levels and the stronger Yen currency at these levels becomes unsustainable (especially for Japanese equities).

Click to enlarge

3) The GBP/USD is currently reflecting the uncertainty and fear of a British exit from the European Union. Should it actually occur, the market fears economic collateral damage. Although recent polling data favors “Brexiters”, the Pound’s significant price decline may already reflect most of these concerns. Its bearish channel has been broken and it may be poised for a bullish snap back, thus surprising many flat-footed investors and traders.